In the land of investing, the only free lunch is diversification. Yes, this blog is also free 🙂 Perhaps that is dessert on top of that diversification free lunch message that I also offer up with regularity. Today’s environment carries more swirling risks and challenges than I have seen in my 30+ year investment ‘career’. That said, thanks to portfolio diversification, our portfolios are at all-time highs and the considerable and mounting risks do not translate to stress. The portfolios hold assets that will respond to ‘most anything’. A key will be to trim assets that are working very well, and move the proceeds to underperforming sectors or assets. It’s time to rebalance the portfolio on the Sunday Reads.
Here is a very solid post on that free lunch, thanks to Morningstar. And from that post, a chart that shows the diversification effect on display during the COVID correction during the first quarter of 2020.
And looking at other recent stock market corrections.
Yes, bonds are usually there to provide support during stock market corrections.
While bonds can do a wonderful job of keeping an eye on the stock markets, we can add to the free lunch of diversification with servings of gold, commodities, real estate, greater international diversification and more. Before the pandemic became the pandemic, I suggested how investors might prepare. The free lunch of greater diversification did pay off beyond the traditional use of bonds in a balanced portfolio.
Here’s – how did the pandemic portfolio perform?
And from 2021 the free lunch of greater diversification continues to deliver. In The Russcession is Coming! you’ll see a portfolio example where I bolt-on inflation protection to a traditional balanced portfolio.
And the key will be to rebalance. We are in periods of wild volatility as assets can quickly move in opposite directions, and they can move in a hurry. Gold and commodities are known to do nothing for long periods (and can even be a major portfolio drag) and then they do everything when inflation hits, and spikes.
The Permanent Portfolio
A wonderful example of diversification is offered by the Permanent Portfolio. I had a quick look at Permanent Portfolio performance, as I am currently writing a post on Seeking Alpha, creating the all-weather portfolio for U.S. investors.
The all-weather portfolio is an extension of the Permanent Portfolio.
From 1972, here is the performance of the Permanent Portfolio – Gold, stocks, bonds, cash.
That is an incredibly straight line (lower volatility) for an investment portfolio. The approach involves (requires) rebalancing between those 4 largely uncorrelated assets.
The traditional balanced portfolio can struggle
My latest for MoneySense looks into the recent struggles of the traditional balanced portfolio that consists of stocks and bonds. A rising rate environment can certainly put downward pressure on stocks and bonds. They can fall together.
Must read: The New Balanced Portfolio.
And who knows what ‘type’ of rising rate environment we might see. Today’s investor is only familiar with the bond bull run from 1981. Will there be a lost decade for the traditional balanced portfolio?
My MoneySense column also looks at the very meaty topic of the redrawing of the global trade maps. We might have a new economic cold war. There will be costs as we bring production and materials acquisition closer to home. Will the world divide into good vs evil trading blocs? Of course, like everything that happens these days, the event is inflationary. 🙁
More Sunday Reads
Assume a $100,000 investment generates an average annual compound return of 7% before total annual advisor and fund management charges of 2%. After 30 years, the investment would be worth $432,194. A 30-year investment that produces the same 7% pre-fee return with total charges of 0.65% would be worth $634,052. A 1.35% cost reduction produces more than $200,000 in additional net return for the investor. Fees matter! You can try out your own scenarios here.
Lower your fees even more (self direct) and the advantage is exaggerated beyond the 0.65% used in that post. Yes, you certainly can retire with twice as much. And that low-fee benefit in retirement when fees don’t eat away at your portfolio, is a greater plus, even compared to the accumulation stage.
On My Own Advisor, we have the debt clock, tax tips and more in the Weekend Reads.
You’ll find a great list of Canadian, U.S. and international reads on the week in review on Dividend Hawk. Hawk also offers the headlines of the week for stocks.
There’s a new post every day, from Monday to Friday, on The Hub. In this post Jonathan Chevreau looks at the CDRs offered by the Neo Exchange. Canadian investors can reduce currency risk and buy U.S. stocks in Canadian dollars. You can buy those U.S. stocks with smaller sums, as well.
Bob at Tawcan created a reader poll and was offered some very interesting results. That includes the investment approach of readers.
On Banker on Wheels, a personal journey to FIRE – financial independence retire early.
On Stocktrades.ca Mat offers the top 6 REITs to consider in 2022.
Thanks for reading. It is time to rebalance the portfolio? We’ll see you in the comment section. You can follow this blog by way of the subscribe button, it’s free!
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